Taking Out a Business Loan with Student Loan Debt

Student loan debt is very common among many people in United States. If you’re a business owner who is seeking a business loan but has debt, you are not alone. It is not impossible to take out a business loan with debt, but it is hard. Applicants that have a long successful track record, excellent credit and low debt levels are more likely to get approved by lenders. An entrepreneur with student loan debt or other outstanding personal loans usually has none of these characteristics.

However, there are steps you can take to improve your chances of getting approved. Once you are approved, you will need to be responsible for managing both loans which may be a challenge.

To help you finance your business despite your student loan debt, this post will have the tips you need to get approved.

How to Get Approved with Debt

The following factors are used by lenders when they are deciding whether to approve or deny your loan application:

  • Character: represented by credit history
  • Capacity: measured by DTI ratio
  • Capital: money you have
  • Collateral: asset than can secure your business loan
  • Conditions: the type, amount, and terms of your loan

Improving your credit history, lowering your DTI ratio, or increasing your wealth will make your loan application more likely to get approved. Putting up collateral that is valuable will make it easier to get approved.

If you have lots of student debt, the best way to improve your chances of loan approval is to pay down your debt. Lenders typically want to see a DTI of 43 percent or lower. So, if your DTI is near or above 43 percent, you’re unlikely to have your application approved.

If you find that you cannot improve your business loan application for whatever reason, consider other types of financing.

Financing Alternatives to Consider

Loans with shorter terms, lower amounts, and higher interest rates are easier to qualify for. Short terms present less risk to the lender that your situation will change and you’re unable to pay. Lower loan amounts limit the amount of money a lender risks losing if you default. Higher interest rates result in larger profits for lenders which make them more willing to take on risk.

This means that short-term working capital loans, microloans, and lines of credit tend to have more lenient eligibility requirements.

Also, online lenders are typically much less strict than traditional lenders such as banks and credit unions. That said, online lenders generally charge higher interest rates.

Other financing options to consider include merchant cash advances, invoice factoring, and purchase order financing.

How to Manage a Business Loan with Debt

Taking on another loan while you’re in debt is very risky. You must create a budget, build an emergency fund, pay on time and in full and monitor cash flow. It’s also important to understand the differences between student and business loans. Once you do, you’ll have a better sense of the options available for managing both loans.

Student loans have grace periods and federal student loans offer many repayment plans. Business loans may or may not have grace periods. Your only repayment option on a business loan is the one attached to your loan offer. Like student loans, you can defer small business loans. However, deferment is usually only allowed for a very limited time and your loan will still accrue interest.

The Bottom Line

While it is risky and difficult, obtaining a business loan with student loan debt is feasible. As mentioned, though, obtaining the loan is just one step. Effectively using your financing requires a responsible, conscientious approach to your finances.